Selling a Business in 2010: State of the Market Address

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2010 was already shaping up to be a rebound year for selling a small business.  Then last week, President Barack Obama gave his State of the Union address and things now appear to be getting even better.

Here’s why:

$30 billion small-business lending program – lending has been difficult yet fairly stable for business buyers over the past couple of months.  Preliminary indications are that the $30 billion small-business lending program announced during the President’s State of the Union Address will tie up the holes that left the 2009 ARC loan program ineffective.  Under the ARC loan program there was no incentive for lenders to actually disseminate funds to small businesses.  Many lenders felt that participation in the program would be viewed negatively by the banking and investment community due to restrictions imposed on the funds and the perception that they would be deemed “troubled” assets.  So, many lenders chose to sit on their hands and not participate in the program.

In the new $30 billion small-business lending proposal made last Wednesday, early indications are that financial incentives will entice lenders to not only participate in the program but actually lend the money to small businesses.  Only small banks (under $10 billion in assets) will be eligible to receive the government backed funding and the dividends they will owe to the US Treasury (the banks cost of funds) will decrease based on how much of the money is lent to small business.

Financial incentives spur action.  I see action coming from this initiative once it takes hold.  If it does, and you’d like to sell your business to a third party, you should begin preparations now.  As more capital becomes available to fund acquisitions, the already strong buyer market will become even stronger.  Be proactive not reactive.

Increased limit on Small Business Administration loans from $2 million to $5 million – SBA loan programs incentivize lenders to take risks on small business loans that they may not otherwise take.  Lending is a risk versus return analysis.  When the return of two different investments is similar, a prudent investor will always act on the investment with the lower risk.  Why not?  Why take more risk for the same return?  Banks are no different.  They are prudent investors (or should be).

That’s why small businesses need the SBA.  The SBA currently guarantees 90% of an SBA loan to the lender.  Meaning, if a small business borrower defaults, the SBA guarantees that the lender will recoup 90% of their investment, even if it means that the SBA must pick up the tab.  This reduces the lender’s risk by 90% and incentivizes banks to include small businesses in their loan portfolios.

By increasing the size limit on SBA guaranteed loans from $2 million to $5 million, more small business deals (sales & acquisitions) are eligible for the SBA guaranteed funding.  The result will be an increased interest by lenders in funding small business deals.

Low Capital Gains Rates or Maybe No Capital Gains Rate – Depending upon how a business sale is structured, certain amounts received by sellers in the sale of their business will be taxed as capital gains.  Capital gains rates are currently set at 15% and set to expire on December 31, 2010.  It has been anticipated for some time that the Obama administration will increase the capital gains rate to at least 20% in 2011.  Meaning, small business owners considering selling their business will save at least 5% in taxes by completing a sale in 2010 versus waiting until 2011.

Now, the wild card…..As recently as last Wednesday, as part of the 2010 State of the Union address, Obama declared that he will, “eliminate all capital gains taxes on small business investment.”  What does that mean?  Does it mean that you will be able to sell your business without incurring capital gains tax?  Will buyers be able to buy your business and then sell it with a tax free gain later?

Although it is not yet clear what the elimination of capital gains means (the details of the program have not yet been outlined) this much is clear, any decrease in capital gains will benefit the marketplace as it relates to buying and selling small businesses.  What is not yet clear is who it will benefit, the buyers or the sellers, and to what extent.